Towards the incorporation of Pre-Packs in Peruvian legislation

Peruvian legislation does not formally encompass the possibility of entering into pre-pack agreements with creditors. Nevertheless, it does include other mechanisms that allow companies to reach agreements with creditors prior to the commencement of an insolvency proceeding. In this article, we will provide a introduction to this topic and to insolvency proceedings in Peru.

I. Introduction

The proceeding known as "pre-pack" (i.e. pre-packaged insolvency), of American origin and implemented (with various variations) in various countries (United Kingdom, Canada, Australia, Spain, among others), aims to facilitate the restructuring of companies, the sale of their assets as a whole, or the sale of the business prior to the commencement of an insolvency proceeding.

This proceeding is implemented through agreements reached between the debtor and its main creditors in a pre-insolvency stage to preserve the value of the business. These agreements – private and confidential – are intended to provide quick and cost-effective solutions to determine the path out of the crisis, so that these agreements can be subsequently ratified in the insolvency proceedings. Thus, the negotiation and adoption of agreements that are often slow, bureaucratic, and costly within the framework of an insolvency proceeding are deferred to a prior stage.

Decisions such as the approval of a corporate rescue plan for the business or the method of selling a block of assets or transferring the business to an acquirer can be agreed upon within the pre-pack framework and later confirmed in a formal insolvency proceeding.

Although the provisions of this proceeding vary in the laws of each country where it has been implemented, they have common characteristics, such as: (i) the use of pre-negotiated agreements with main creditors; (ii) confidentiality, and (iii) appointment of an administrator or supervisor to ensure that the interests of those involved are not violated.

By their nature, these proceedings aim to enable the debtor to privately and confidentially negotiate preservation solutions for the productive unit with their main creditors to avoid the negative consequences inherent in the disclosure of their entry into an insolvency proceeding, including possible loss of financing, suppliers, customers, and employees.

II. Peruvian insolvency regime and the feasibility of adopting a pre-Insolvency agreement

The "pre-pack" is not regulated in the Peruvian Insolvency Law.  However, our regulation provides for other types of proceedings, which allow debtors and creditors to reach a similar objective.

The Peruvian Insolvency Law regulates two types of proceedings: The ordinary insolvency proceeding (OIP), and the preventive insolvency proceeding (PIP)

(i) The ordinary insolvency proceeding (OIP): Designed for insolvent companies, for creditors to decide on their economic fate, choosing between:

a) Corporate restructuring if the business is viable; or

b) Dissolution and liquidation if the business is deemed non-viable and it is more profitable to liquidate than allowing it to continue operating.

The OIP has the common characteristics of traditional insolvency proceedings in comparative law, meaning that the debtor's submission is made public through notice publication. From the date of that publication, the following legal effects are generated: (i) the debtor's payment obligations become unenforceable until the creditors' meeting (or “board”) approves distributions schedules under a plan; and (ii) a framework of protection is established over its assets, ceasing any enforcement measures against it (e.g. seizures, coercive collections, dispossession measures, etc.).

The sale of productive units to meet debt obligations is an operation that can be approved within the restructuring, ongoing liquidation, and dissolution and liquidation insolvency proceedings.

Indeed, when the creditors' meeting has decided to subject the debtor to a corporate restructuring, the business will continue to operate and its productive assets should, in principle, be preserved. However, this does not prevent the board from evaluating an offer from a third party to acquire all the business assets. In that case, the board may decide to change the economic destination to liquidation and proceed with such a sale. In the framework of liquidation, the goal is to sell assets to pay recognised claims. Consequently, the liquidator will be interested in submitting to creditors´ approval an offer from a third party interested in acquiring all the assets.

Ongoing liquidation is an exceptional form of liquidation proceeding. Through it, the business can continue operating for a term period (a maximum of two years) if the creditors' meeting believes that there is a possibility of obtaining a higher value of assets within that period, transferring the ongoing business to an acquirer.

In any case, the creditors' meeting has the power to decide how to maximise the value of the debtor's assets.

(ii) Preventive insolvency proceeding (PIP): Designed for companies in a reversible financial crisis but with equity solvency where creditors can approve a global debt refinancing agreement (GRA).

Through this proceeding, the debtor seeks to refinance the payment of its obligations under terms and conditions that allow for better management of its liquidity. Creditors have the authority to approve or disapprove the terms of the GRA, following the typical rules of insolvency proceedings (e.g. publication of the debtor's voluntary submission, establishment of a recognised creditors' board by the insolvency authority, quorums for the board's installation and adoption of agreements, among others).

In the PIP, the debtor is allowed to request, upon its acceptance, the benefits of suspending the enforceability of its insolvency obligations and that assets be protected from dispossession measures (e.g. seizures, asset execution, etc.). If the GRA is not approved by the board after these benefits have been requested, the debtor may be subject to an ordinary insolvency proceeding, in which the board will replace the highest-ranking corporate body and take control of the business, dispossessing the debtor by appointing an insolvency administrator in the context of an asset restructuring proceeding or a liquidator in the context of a dissolution and liquidation proceeding.

In both proceedings, the liability audit (i.e. recognition of claims) and negotiation between the debtor and creditors about their fate and the applicable regime will take place within the initiated and publicised insolvency proceeding with no provisions addressing pre-insolvency agreements or negotiations.

This does not mean, however, that a debtor is prohibited from negotiating with creditors before entering into an insolvency proceeding to agree on the terms and conditions of instruments to be submitted for approval by the future Creditors' Meeting. On the contrary, such agreements may be necessary and desirable in some cases to pre-determine the path out of the crisis, streamline the insolvency proceeding, and reduce the time the debtor is subject to such a proceeding.

II.1 Possibility of entering into private agreements prior to a PIP

There is no legal impediment for the debtor to privately negotiate and obtain approval for a debt refinancing agreement with its creditors in Peru. These agreements are supported by the right to freedom of contract, as enshrined in the Constitution of Peru, and can be governed by the provisions of the Civil Code.

The implementation of these pre-agreements can be carried out through contractual instruments, such as the signing of commitment letters that include the obligation of the signatories to vote in favour of the pre-approved GRA in the insolvency context.

II.2 Possibility of entering into private agreements prior to an ordinary insolvency proceeding (OIP)

Similar to the previous case, private agreements that the debtor may have entered into with creditors aimed at revitalising the business prior to the commencement of an ordinary insolvency proceeding are valid (and even desirable). However, the adoption of such agreements is not common practice in Peru.

Regarding pre-insolvency agreements that include stipulations stating that the debt will be satisfied with the proceeds from the sale of one or more productive units of the business, it should be noted that the ratification of this agreement in the insolvency proceedings will require the debtor to have the advance approval of all its creditors or the holders of claims representing a qualified majority (more than 66.6% of the total). It should also be noted that if among these creditors there are those who have a connection with the debtor, "class voting" will be carried out in the insolvency proceedings. (Related and unrelated creditors will vote separately, and the agreement can only be reached if both groups achieve a qualified majority).

Therefore, for a pre-insolvency agreement for the sale of a productive unit to be successful and not subject to a challenge in Insolvency proceedings, the approval of all creditors should be obtained.

In this regard, the use of contractual instruments in which the unequivocal will of all creditors to approve this operation is recorded will be the evidence the debtor needs to defend itself if any dissenting or hostile creditor attempts to impute fraudulent conduct with regard to the disposition of assets.

III.3   Issues to take in consideration when entering into pre-insolvency agreements

The Peruvian Insolvency Law does not provide for instances of approval or confirmation of "pre-insolvency" agreements. Therefore, such agreements cannot be considered "binding" within the framework of an initiated and disclosed insolvency proceeding. In other words, the existence of such agreements does not exempt subscribing creditors from participating in the voting process for the approval of insolvency instruments (e.g. a restructuring plan or global debt refinancing agreement).

Furthermore, if any of these creditors decide to deviate from the agreement by voting differently from the pre-established terms, such dissent cannot be reported to the insolvency authority to compel said creditor to abide by the pre-agreement.

From the above, it follows that in cases where pre-insolvency agreements have not been adopted by all creditors (or a qualified majority), there is a risk that they will not be ratified in insolvency proceedings. The risk that acts of asset disposition through an agreement with a reduced number of creditors being will be challenged in the context of a judicial process of insolvency inefficacy is critical.

If, through a pre-insolvency agreement, the debtor and a group of creditors decide on the sale of assets or a productive unit, this operation – in the context of an insolvency proceeding – may be reviewed later by non-subscribing creditors within the framework of the insolvency proceeding and challenged before the judiciary, when carried out during the "suspicion period" and when there is evidence that such sale of assets is prejudicial to the debtor´s business. Moreover, any sale of assets or a productive unit must be adopted carefully and with supporting evidence that it is being executed in favour of preserving value for the future payment of creditors.

In this regard, it should be noted that Article 19.1 of the Peruvian Insolvency Law establishes a suspicion period for acts that: (i) do not relate to the normal development of the debtor's activity; (ii) harm its assets; and (iii) are carried out within the period of one year prior to the filing of the petition to initiate the insolvency (a voluntary petition by the debtor) or prior to the notification of the petition by a creditor (an involuntary petition). For an act to be ineffective, all three of these requirements must necessarily converge.

III. Towards regulated Pre-Pack Agreements: the future of Peruvian insolvency law 

The implementation of a pre-pack agreement must be carefully evaluated to ensure that it complies with the principles of justice, fairness, and the protection of the rights of all parties involved. Additionally, it is necessary to consider the experience and best practices of other countries that have already implemented the pre-pack proceeding.

Nevertheless, we believe that it is less difficult to introduce improvements in the regulation of the preventive insolvency proceeding (PIP), facilitating the adoption of pre-insolvency agreements that the debtor may conclude with strategic creditors for their business, such as financiers and key suppliers. These agreements can be negotiated privately and then homologated by the insolvency authority while maintaining their confidentiality. In this way, the debtor can achieve the refinancing of obligations with creditors critical to the continuity of their business by obtaining their acceptance through legally authenticated instruments and by simply requesting their homologation and registration with the insolvency authority.

We believe that by introducing these improvements, the PIP could be streamlined, eliminating the requirement for disclosure of the debtor's acceptance and the approval of a GRA by all creditors.

Regarding the OIP, we believe that modifications can be made to the legislation to allow the insolvency authority to homologate pre-insolvency agreements aimed at restructuring the debtor's assets, provided they are documented in notarised instruments and have been entered into with all creditors involved in the crisis.

To date, we believe there are strong foundations for formally introducing pre-pack proceedings into the Peruvian insolvency system. Notwithstanding, our current proceedings provide opportunities for agreements with creditors that can achieve similar outcomes and facilitate a company's recovery from its financial difficulties.

For more information on pre-pack procedures and insolvency law in Peru, contact your CMS client partner or these CMS experts.